What is DeFi? A Beginner’s Guide to Decentralized Finance

Decentralized finance, or DeFi, represents a revolutionary shift from the traditional financial system. Unlike conventional banking, DeFi eliminates the need for intermediaries and operates solely on a blockchain. This means that users directly interact with applications and smart contracts to access various financial services, such as lending, trading, and earning yields.

In 2024, the DeFi sector saw an impressive $133.6 billion in total value locked, more than doubling the $50 billion reported just a year prior in 2023. By late 2025, this number had reached an astounding $172 billion. Despite these impressive figures, DeFi still faces significant challenges, such as the lack of consumer protection and the absence of deposit insurance.

The technology behind DeFi relies on smart contracts, which are self-executing pieces of code stored on a blockchain. These contracts automate the execution of agreements and financial transactions when predefined conditions are met. Users interact with these contracts through decentralized applications (dApps), which are essentially websites or mobile apps that connect directly to the blockchain.

Ethereum dominates the DeFi landscape, accounting for over 68% of the total value locked. However, other blockchains like Solana, BNB Chain, and Avalanche also play a role, offering faster transactions or lower fees. The use of DeFi has grown exponentially, with smart contract interactions accounting for nearly 62% of all daily transactions on Ethereum, with DeFi protocols contributing around 25% of the network's transaction volume.